Financial Crime and

Fraud Investigation:
Dynamics of Corporate
Fraud

Learning outcomes:
Appreciate the context of fraud
Understand the fraud triangle
Describe the main factors to prevent
corporate fraud
Appreciate the impact of corporate culture
on the incidence of fraud

Introduction
First and foremost fraud is a people
problem. It is not an accounting dilemma.
The primary perspective here is internal
fraud.

Defining Occupational
Fraud and Abuse
The use of ones occupation for
personal enrichment through the
deliberate misuse or misapplication of
the employing organisations resources
or assets
At all levels of an organisation

Fraud Definition

Fraud: criminal deception; the use of false

representation
OED

Elements of Fraud
A material false statement
Knowledge that the statement was false
when it was uttered
Reliance on the false statement by the
victim
Damages resulting from the victims
reliance on the false statement

Opportunity
The Fraud Triangle
helps explain the
human process for
committing fraud

Fraud
Triangle
Pressure

Rationalisation
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Fraud Triangle Pressure

Pressure can be real or imagined

Compulsive

Gambling, alcohol, illegal drug use

Financial

debts

Credit cards, health care

Family

behaviours

problems

Divorce, extramarital affairs, problems with

children

Pressure

on employees can be reduced via

Employee Assistance Plans, counselling and
work assignments. EAPs are managements
tool to help control fraud.

Fraud Triangle - Rationalisation

Employees, vendor, others justify fraud:

They owe me or I earned it
I need it more than they do
Its only fair
God will forgive me
Rationalisation is a form of denial. The person is
not accepting reality.
Rationalisation is the hardest area for
management to influence or control.
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Fraud Triangle - Opportunity

Opportunity is the perception by someone
believing they can commit a fraud without
getting caught.
Management controls and influences
opportunity more than any other factor in
the Fraud Triangle.
Management tools are employment
checks, internal controls, internal and
external audits and a host of other
techniques.

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Major areas of exposure

corruption, which includes conflicts of interest,

bribery (including kickbacks), illegal gifts, and
economic extortion;
misappropriation of assets, which includes
skimming, theft, and asset misuse; and
financial statement fraud, which can include
financial (either asset or revenue over- or
understatements) and non-financial components
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Prevention VS Detection
Prevention is better than treatment
In order to prevent fraud there is a need to
make an organisation immune against
fraud

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Reducing the risk of fraud

The means to reduce risk

Prevention

Reduce the opportunity for

Deterrence (punishment)
Detection

Detection of fraud is much more costly

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Responsibility of Fraud Prevention

Management has the responsibility and

means to implement measures to reduce the
risk of fraud
Good

corporate governance reduces the risk

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Elements of prevention
Create and Maintain a culture of honesty
and high ethics
Evaluate the risk and implement policies,
procedures, and controls to mitigate the
risk and reduce the opportunity
Develop appropriate oversight processes

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Setting the tone at the top

Lead by example (words and actions)
Management has to

Behave

Ethically
Communicate its intolerance for dishonest
and unethical behaviour

Employees must be treated equally with

disregard to position
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Setting the tone at the top

Set achievable financial goals (not to
create undue pressure)
Create a code of ethics and implement it
The code of ethics should be clear,
understandable and developed in a
positive participatory manner

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Positive work place environment

wrongdoing occurs less frequently when

employees have positive feelings about an entity
than when they feel abused, threatened, or
ignored
Without a positive workplace environment, there
are more opportunities for poor employee
morale, which can affect an employees attitude
about committing fraud against an entity
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Factors that detract from a positive

work environment
Top management that does not seem to
care about or reward appropriate behaviour
Negative feedback and lack of recognition
for job performance
Perceived inequities in the organisation
Autocratic rather than participative
management

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Factors that detract from a positive

work environment cont.

Low organisational loyalty or feelings of ownership

Unreasonable budget expectations or other financial
targets
Fear of delivering bad news to supervisors and/or
management
Less-than-competitive compensation
Poor training and promotion opportunities
Lack of clear organisational responsibilities
Poor communication practices or methods within the
organisation
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Discipline
The way an entity reacts to incidents of
alleged or suspected fraud will send a
strong deterrent message throughout the
entity, helping to reduce the number of
future occurrences.
The consequences of committing fraud
must be clearly communicated throughout
the entity.

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Response to an alleged incident of fraud

A thorough investigation of the incident should

be conducted.
Appropriate and consistent actions should be
taken against violators.
Relevant controls should be assessed and
improved.
Communication and training should occur to
reinforce the entitys values, code of conduct,
and expectations.

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EVALUATING ANTIFRAUD
PROCESSES AND CONTROLS

Fraud cannot occur without a perceived

opportunity to commit and conceal the act.
Organisations should be proactive in reducing
fraud opportunities by
(1)
(2)
(3)

Identifying and measuring fraud risks,

Taking steps to mitigate identified risks, and
Implementing and monitoring appropriate preventive
and detective internal controls and other deterrent
measures.

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Fraud Detection

The two most frequent methods of detecting

fraud are:
Internal

audits. Internal auditing for fraud is being

encouraged as a best practice

About 24% of the time

Tips

from employees or associates

Establish a Whistle Blower hotline for employees,

vendors and others to call in suspected fraud.

About 40% of time

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Fraud Detection

Rules of thumb for frauds:

Frauds

start small and continue to grow in time

they dont stop themselves
Longer the fraud in time, the greater the loss

Two other ways to detect fraud:

By

chance or accident about 21% of time

Proactively searching for fraud by checking and
investigating red flags symptoms of fraud
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Symptoms of Fraud

Symptoms of fraud
Accounting

anomalies
Internal Control weaknesses
Analytical anomalies
Extravagant lifestyles
Unusual behaviours
Tips and complaints
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References

Dreibeblis, D (2006) Dynamics of Fraud

Ethical and Legal Issues, Clifton
Gunderson.

Quiffa, H.C. (2007) Fraud Prevention

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